Secondary economic impact

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Secondary (indirect) economic impact are changes in economic activity resulting from subsequent rounds of (re-)expenditure(s) of business companies, households and public authorities directly involved with the specific program/project or security event and trade partners who are indirectly involved (the outsiders). The source of these 're-expenditures' lies in the primary economic impact generated by a program/project or security event. Secondary economic impact is a frequently used category of economic impact.

Description

Secondary economic impact is the effect resulting from subsequent rounds of (re-)expenditure of different sectors in the economy. These rounds of expenditure and susequent re-expenditures are also referred to as the 'effects of the first and higher order'. For example: an investment in a school will lead to first order effects (direct effects) and effects of higher order (indirect effects).

In case of a focus on the re-expenditures by households, economists in general call these effects induced economic effects. Employees of companies and public organisations, for instance, earn wages that are spend on food, clothing, shelter and other consumer goods and services. This leads to further indirect transactions throughout the economy.

The relationship between one form of economic activity and the total additional activity generated by a specific policy or event are called the multiplier effect. The term multiplier is used since the indirect and induced impacts make the overall economic impact substantially larger than the direct impacts alone[1]. For example: If a major regional plant closes due to e.g. a terrorist event/threat, not only people working at this factory will lose there jobs/income, but also supporting industries are hurt by the indirect effects, and in the end, the entire local economy will suffer due to the reduction in regional household income, tax revenues and business profits.

Welfare effects versus secondary effects

The sum of direct and indirect effects is not necessarily the same as the welfare effect of a project/program or security event. An indirect effect only has an additional welfare effect on the local economy if local and regional markets can be defined as "imperfect", e.g. if there exist unemployment, monopoly situations, etc. in the home region. For example: In case a local government decides to invest in a high tech industry campus, but there is no unemployment in the region, the campus will only be able to attract skilled workers by 'importing' them from other regions or offer higher wages to attract local workers. This can be regarded as subsidised labour, which will not contribute to the local economic welfare since these workers are either not from the 'home' region or already had paid jobs. However, in case a company located on the campus can increase its productivity thanks to its ability to hire skilled foreign expertise, the investment in the campus can be regarded as an additional welfare effect for that matter.

Examples of secondary economic impact

These examples are closely related to the provided examples in the page on the primary economic impact.

Crime

Crime

Crime not only leads to financial or physical damage and prevention costs, but also indirectly influences the local/regional and national economy of a country. According to crime economists Detotto and Otranto (2010)[2],“crime acts like a tax on the entire economy: it discourages domestic and foreign direct investments[3]. On a macro-economic level crime influences:

  • economic growth;
  • income;
  • labour force participation;
  • income spent on security measures; and
  • reallocation of resources creating uncertainty and inefficiency.

On a more local and regional level, economists define the following types of impact of crime:

  • business impact (crime reduces competitiveness of companies and investments)
  • impact on property value
  • tourism impact
  • impact on quality of life/social capital

According to specialised economists Tita, Petras and Greenbaum (2006)[4] “crime serves as an important catalyst for change in the socio-economic composition of communities. The effect crime has on the local property value is one of those catalyst effects. A study by Ihlanfeldt and Mayock (2009)[5], for example, concludes that a 10 percent increase in violent crimes within a neighbourhood is reducing property values by as much as 6 percent. Other research points out that criminal offences such as vandalism and graffiti (also) have a significant negative impact on real estate prices[6]. Furthermore, in 2011, a UK police website, where users can view the number of criminal offences at street level, led to worries among house owners and real estate agents that the house prices drop if crime rates are relatively high[7]. Another effect of crime is that residents become less committed to their communities, causing the ‘social fibre’ of the community to be weakened. An example of the loss of social capital is that residents of neighbourhoods with a criminal reputation are judged to be associated with criminal activities, leading (amongst others) to stigmas that, for example, prevent those people from finding jobs[8].

Terrorism: Aviation security

Screening in DTW Airport

Due to 9/11 aviation security has become a major influence in the United States and in the European Union. In 2011, the US devoted $ 6.5 billion to protect the aviation industry. This amount, however, is not the complete picture since there are also security expenditures on a local authority level, by the private sector, and by consumers (higher ticket prices). On top of that, aviation security measures also create less tangible costs, including the value of increased waiting lines at security checks at airports, and the negative connotation of security procedures. Calculations of the direct impact of aviation security measures is a good starting point, but the measures also have an indirect impact, for example, in terms of changes in profits of aviation related businesses such as tourism, the car rental industry, bus companies, and security industry. Sometimes these effects are hardly visible and interrelated due to chain effects in the economic system. In most cases, however, they are very difficult to quantify and remain an open question or an educated guess.

A new highway

Highway

The realisation of a new highway does not only generate effects for the direct owners and users of the highway, but could also generate the following secondary effects (depending on the primary impacts):

  • An improved functioning of the markets in the local economy as a whole due to a reduction of transport costs.
  • An improved functioning of labour markets due to its increased size.
  • Scale and agglomeration advances due to an increased size of the market
  • Spatial and strategic effects due to an improved reach ability of the area.

A newly developed tourist area

Tourism

The total impact of the development of a tourist area (with hotels, apartments, bars and clubs, and so on) is not limited to the direct economic impact, but will also lead to jobs, turnover and revenues for other sectors in the economy such as: trade, real estate, the financial sector, hotels and restaurants, transport & communication, manufacturing, and so on. The tourist sector, in turn, will generate business for the trade sector, the financial sector, the real estate sector, agriculture, and so on.

Related subjects

Footnotes and references

  1. Weisbrod, B and G. Weisbrod (1997): Measuring economic impacts of projects and programs. Economic Development Research Group.
  2. Detotto,C. and E. Otranto (2010): Does crime affect Economic growth? KYKLOS, Vol.63–August 2010-No.3, 330-345.
  3. Foreign direct investment (FDI) is a direct investment by a business or enterprise in a foreign economy. The motives of FDI are diverse, for example, to reduce export costs (less transport and export tariffs) or to take advantage of local labour forces and know-how.
  4. Tita, G., T. Petras, and R. Greenbaum (2006): Crime and Residential Choice: A Neighbourhood Level Analysis of the Impact of Crime on Housing Prices. Journal of Quantitative Criminology. Vol 22, No 4, Pp 299-317.
  5. Ihlanfeldt, K., T. Mayock (2009): Crime and Housing Prices. Department of Economics and DeVoe Moore Center, Florida State University
  6. Gibbons, S. (2004): The costs of urban property crime. The Economic Journal. No 114 (499). ISSN 0013-0133.
  7. King, M. (2011): Online crime maps could drive down house prices, warn property analysts. The Guardian. Online: http://www.guardian.co.uk/money/2011/feb/01/police-crime-website-house-prices
  8. UNODC and World Bank (2007): Crime, Violence, and Development: Trends, Costs, and Policy Options in the Caribbean. Report No. 37820.